Pivotal Events

The following is part of Pivotal Events that was
published for our subscribers Thursday, November 6, 2008.

SIGNS OF THE TIMES:

A Year Ago:

"Exorcising Ghost if Octobers Past"

"Despite Housing Slump, Crashes Such as in 1987 Likely to Stay Memories"

- Wall Street Journal, October 15, 2007

Well, it wasn't like 1987 - it is like 1929 or 1873.

"I think the Fed has taken care of the summer's harrowing turbulence
by cutting short-term rates, pumping money into the system and seeming
determined to prevent a recession."

- Wall Street Journal, October 15, 2007

Conventional wisdom still seems unaware that in a post-bubble contraction
treasury bill rates decline until the bear is over.

We haven't mentioned the recession for a while - there have been more interesting
market opportunities to discuss. However, our view has been that the climax
of a financial bubble and the peak of the business cycle have been almost
coincidental. In 1929 the stock market peaked in early September and the
NBER deemed that economy topped in August. In 1873, the stock market ended
its speculation in September and business peaked in October.

On normal cyclical contractions the recession, as determined by the NBER,
usually start a year after the stock market high and in showing a certain
inability to forecast the NBER decision is typically announced a year after
the date they set as the start of the recession.

For those who have waiting for the mighty decision before adjusting positions,
the wait is almost over. The pattern suggests that the NBER is about to make
its announcement and the recession may have started in 4Q2007.

This Year:

"These institutions [Fannie and Freddie] are fundamentally sound and
strong. There is no reason for the kind of [stock market] reaction we're
getting."

"The United States witnessed a boat boom from 2000 to 2006 as buyers
used the equity in their homes to put down payments on vessels, big and
small."

- Financial Post, July 19, 2008

On the failure of yacht dealer in Ontario

"I'm trying to save the planet; I'm trying to save the planet!"

- Nancy Pelosi, House Speaker, Politico, July 29, 2008

* * * * *

Stock Markets: Using the S&P the rebound amounted to 20% in six
days and is the most overbought on our "summation" thing since the rebound
highs made on July 23 and May 16. The rebound from Black Friday's low added
up to 25%.

This sets a series of lower highs on each rebound, which is not healthy. The
action is now heading into the November "test" of the classic fall panic. The
test could be slightly above or slightly below the worst of October, or maybe
a perfect "Goldilocks". Which would be at the low.

Cadres of international socialists, do-gooders, meddlers, and the terminally
anxious are celebrating Obama's win. While understandable, it should be kept
in mind that this mob won't promote stocks, and what's worse they will force
their compulsions about perfection upon the markets. It's worth noting that
as a political phenomenon it seems without precedent. Perhaps it's a mania
equivalent to the housing or commodity bubble.

Fortunately the Dems didn't obtain a super majority, which could constrain
their ambition to merely the Captain Bligh treatment: "Floggings will continue
until morale improves". Naturally they will demand more money from an economy
suffering a severe contraction.

Then there is Mother Nature and Mister Margin who have shown, yet again, that
they can trump even today's ambitious central planners. Indeed, more than likely,
they will overwhelm policymakers appointed by the next administration.

Nevertheless, we have hopes that stock markets can muster a tradable rally
into March-April.

This would be within the context of a cyclical bear market. It is worth emphasizing
that Downside Capitulations on the DJIA have been rare since the index began
in 1895. One in 1966 and three during the 1929 to 1932 decline. The one in
October is likely the first of a potential three such panics.

Near Term: Yesterday's ChartWorks reviewed the overbought condition,
which set up a

timely slide. The chart also showed the Capitulation registered in October.
It is useful to have a model that works both ways.

INTEREST RATES

The Long Bond is doing the knee-jerk rally that goes with a stock slump.

However, this is within a stair-step decline since the blow-off high of 124.73
in mid September. As noted last week there is support in the 112s and it held.
So far the bounce is approaching overhead resistance at 117.

The pending change in US government will not be kind to fragile capital markets,
within which long treasuries are the last asset class to really get worked
over.

The main direction is down in price, up in yield and as with Bill Clinton,
Obama is probably innocent of knowledge about bonds. Late in 1993 when Clinton
was gearing for the next election long rates were rising and he expected that
they could be reduced at will. When told it couldn't be done he angrily stated
that his political success should not be messed up by "f....g bond traders".

Traders have been playing the short-side and steepeners. Investors have been
in the five-year maturities, that usually show a good return during a post-bubble
contraction.

Credit Spreads: It is interesting that money-market spreads generally
widened as the federales were injecting a growing amount of liquidity. This
began in January. When the seasonal turn to widening expected in May came in,
we advised that spreads could widen to dislocating conditions in the fall.
This worked out as dealer commercial paper rates decreased to 262 bps in May
and soared to 525 bps with the panic in mid October.

On the move, the spread over the three-month bill widened from 145 bps to
525 bps. Much has been said about Libor, but dealer commercial paper had the
bigger trip and as noted in our October 23 edition this sector was beginning
to ease - naturally - setting up the next stock rally.

Pressures on long corporates continue. The junk yield, that was at 11% when
all was well a year ago, is now out to 29.25% yield, which represents a price-plunge
from 100 to 37. Even the investment-grade BBB has increased in yield from 6%
to 10.5%.

However, the price decline this week has been modest and since last week we
have been expecting some relief. Just a little relief.

Currencies: The Dollar Index registered an Upside Exhaustion on October
23 and we advised that the currencies, including the euro/yen could correct
for a while. This would release some rallies in the beat up stocks, commodities
and the Canadian dollar.

This generally is working out and the DX could be steady for a week or so
as the stock market tests the lows.

The opinions in this report are solely those of the author.
The information herein was obtained from various sources; however we do not
guarantee its accuracy or completeness. This research report is prepared for
general circulation and is circulated for general information only. It does
not have regard to the specific investment objectives, financial situation
and the particular needs of any specific person who may receive this report.
Investors should seek financial advice regarding the appropriateness of investing
in any securities or investment strategies discussed or recommended in this
report and should understand that statements regarding future prospects may
not be realized. Investors should note that income from such securities, if
any, may fluctuate and that each security's price or value may rise or fall.
Accordingly, investors may receive back less than originally invested. Past
performance is not necessarily a guide to future performance.

Neither the information nor any opinion expressed constitutes
an offer to buy or sell any securities or options or futures contracts. Foreign
currency rates of exchange may adversely affect the value, price or income
of any security or related investment mentioned in this report. In addition,
investors in securities such as ADRs, whose values are influenced by the currency
of the underlying security, effectively assume currency risk.

Moreover, from time to time, members of the Institutional
Advisors team may be long or short positions discussed in our publications.